MFG in the BUY zone, page-913

Latest recommendation report

Valuation:$50.50

Last updated:

07/12/21

Magellan CEO Departure Does Not Impact Group Earnings Outlook, FVE Unchanged at AUD 50.50

Investment rating

Magellan has historically delivered above market returns with relatively low drawdowns. This has allowed it to rapidly grow scale in FUM to over AUD 110 billion and provides the foundation for continued earnings growth. While we don't believe it will be immune from the structural trend of investors moving to passive investments, ongoing competition among fund managers and major institutions in-housing their asset management, we think it's better placed than most active managers to address these headwinds. Magellan is moving beyond just managing money, to implementing new initiatives such as product expansion to attract new money. There are prospects of stronger inflows, notably from Australia's self-managed superannuation funds, the ageing demographic, and fee-conscious investors who were previously discouraged from investing with Magellan. However, continued strong performance will remain key.

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Recommendation impact (last updated: 07/12/2021)

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Event analysis

Magellan CEO Departure Does Not Impact Group Earnings Outlook, FVE Unchanged at AUD 50.50

We retain our fair value estimate on narrow-moat Magellan at AUD 50.50. We think Dr. Brett Cairns' departure has no bearing on the group's earnings outlook. Dr. Cairns assumed the role as CEO in 2019 and played a pivotal role in driving Magellan's product enhancement initiatives, notably its exchange traded products and retirement income fund, FuturePay. He is also a board member at investment bank Barrenjoey, a principal investment of Magellan's, though we understand he will be relinquishing that position as well.

We don't expect Magellan's corporate strategy to change. CFO Kirsten Morton will assume the role of interim CEO while a new CEO is found. Key person Hamish Douglass remains chairman, chief investment officer and lead portfolio manager.

The main takeaway for investors is that Dr. Cairns leaves Magellan with a product suite with strong growth prospects. It allows Magellan to capitalise on emerging investor trends--namely the need for retirement income (via FuturePay), growing allocation to passive investments (via MFG Core Series), and the popularity of environmental, social, and governance, or ESG, investing (via the Magellan Sustainable strategy). We expect these products to drive about AUD 2 billion of inflows over the medium term, and remind investors that new funds typically take around three years to build a credible track record before they attract meaningful funds under management, or FUM, flows.

With AUD 116 billion in FUM, it is the compounding of market returns that drives Magellan's earnings, not net inflows. We forecast market returns averaging 9% per year over the next five years, more than offsetting our forecast cumulative outflows from its mature retail funds of AUD 5 billion (or 4% of current FUM). We currently bake in AUD 3.5 billion of net institutional outflows from fiscal 2022-24--not large--as most of Magellan's institutional clients hire it to deliver absolute returns of 10% per year, which it soundly delivered.

Previous close	Market cap
$29.100	$5,404 Million
52 week high/low
$58.520 - $28.660
Sector
Diversified Financials

Intrinsic valuation

Moat rating	Narrow
Business risk	Medium
Pricing risk	--
Company beta	0.71
Sector beta	1.23

Year	06/20A	06/21A	06/22E	06/23E
NPAT ($m)	438.3	412.7	489.2	513.2
EPS (c)	241.5	225.0	266.2	279.2
% change	17.2	-6.8	18.3	4.9
DPS (c)	214.9	211.2	234.0	240.6
Franking (%)	75.0	75.0	75.0	75.0
Yield (%)	3.9	3.9	8.0	8.3
PER (x)	22.6	23.9	10.9	10.4
Source: Aspect Huntley analyst estimates.

6 month price chart